As the end of the year and year-end holiday season approach, so do annual bonus time and paid holidays. Employers should avoid some common wage and hour pitfalls with bonuses and paid holidays. The first common pitfall is not including certain bonuses in an employee’s regular rate of pay for overtime purposes. Non-discretionary bonuses must be included in employees’ compensation in computing their regular rates of pay for overtime purposes. To further complicate matters, annual bonuses that are based on performance throughout the year (as opposed to a more definite period of time like a week or quarter) must be included in the regular rate of pay for work weeks in which the non-exempt employee worked overtime. In other words, employers are required to go back and recalculate additional overtime payments based on the bonus for weeks in which employees worked more than 40 hours. However, under the Fair Labor Standards Act, certain discretionary bonuses, gift cards or other holiday gifts can be excluded from the regular rate of pay for overtime purposes. In order for a bonus to be truly discretionary, the employer must have the sole discretion as to whether the bonus is paid and the amount of the bonus to be paid.
The second common pitfall is including holiday pay towards hours worked for overtime purposes, even if employees did not work on the holiday. For example, if your business is closed on Christmas, but you pay employees eight hours for Christmas, you do not need to include the eight hours as hours worked for overtime purposes, unless required by an employment contract, company policy or collective bargaining agreement. Another common holiday season wage and hour pitfall concerns the treatment of employees on FMLA leave during the week of a paid or unpaid holiday. As to paid holidays, unless an employer’s policy is that employees on other forms of leave receive holiday pay if a paid holiday occurs during their leaves of absence, employees on FMLA leave are not entitled to holiday pay. Additionally, where a holiday occurs within a full week taken as FMLA, the entire week is counted as a week of FMLA leave, and the employee does not receive additional FMLA leave for the holiday. For example, if an employee is on FMLA leave for the entire week of Christmas, you count the entire week towards their FMLA allotment, even if the business is closed on Christmas, or the business day following or preceding Christmas if Christmas falls on a weekend. However, if an employee is using FMLA leave in increments of less than one week, the holiday will not count against the employee’s FMLA entitlement unless the employee was otherwise scheduled and expected to work on the holiday. Similarly, if for some reason the employer's business activity has temporarily ceased and employees generally are not expected to report for work for one or more weeks (e.g., closing for two weeks during for the Christmas/New Year holiday or closing the plant for retooling or repairs), the days the employer's activities have ceased do not count against the employee's FMLA leave entitlement. Finally, employees classified as exempt from overtime must be paid for the entire work week, even if the business is closed for a holiday. It is a violation of the salary basis requirement to deduct time not worked by an exempt employee under these circumstances.